Powell vs Trump – Both Are Right and Wrong

Yesterday, the Federal Reserve “paused” keeping the fed funds rate unchanged. President Trump has been critical of Chairman Powell in public. Chairman Powell has refused to answer questions about President Trump, but is intentionally initiating conflict. I think both men have good and bad points on this topic so let’s dive in to all four parts of the drama between the world’s most powerful man and the world’s most powerful central banker.

 

Chairman Powell:

Where he’s right – The Fed was right to “pause” and not lower rates. The CPI has been increasing since the Fed cut the fed funds rate in September, today’s PCE is higher than last month, and Congress is still spraying debt-funded stimulus into the economy. He was also right not to respond to President Trump’s demand to lower the fed funds rate and to say he wouldn’t resign if asked to do so.

 

Where he’s wrong – The Fed has abandoned the appearance of neutrality. Lowering the fed funds rate just ahead of the November election looked partisan. Worse, somehow the Fed was fine lowering rates while a Democratic White House and Congress spent insane amounts of money causing years of inflation. Yet, Powell and Fed Governors are now saying they won’t lower rates because a Republican White House and Congress might continue overspending and there might be tariffs (which have yet to be defined and decided). DKI has been on record for months saying that no matter whether you voted for team red or team blue, Congress was going to overspend and we’d have more inflation.

 

President Trump:

Where he’s right – He blamed Powell and the Fed for inflation. While DKI has put more blame on Congress, the Federal reserve kept rates at or around zero for almost a decade, was far too slow to start raising rates when inflation picked up, and was too quick in lowering the fed funds rate. Powell and the Fed deserve plenty of blame and President Trump is correct to say this. In addition, while Trump was a big spender in his first term, he’s currently doing a lot of things that could help lower inflation. He’s trying to encourage more US-based manufacturing. He has DOGE trying to lower government costs. He’s offered government employees buyouts in an effort to voluntarily reduce the size and cost of government. And he’s instituted a rule that for every new regulation that restricts business, the government needs to eliminate 10 old regulations. If you want to encourage economic growth so that it will keep up with the growth in the money supply and reduce inflation, that’s an impressive and hopefully effective first week.

 

Where he’s wrong – President Trump has commanded the Fed and other central banks to lower interest rates. He doesn’t have that power and trying to strongarm people who don’t answer to him is a bad look. It will also be ineffective at persuading these people to cooperate with him. As someone who uses economic growth and the stock market as a report card for his Presidency, I can understand why Trump wants the stimulus of low interest rates. However, as DKI predicted in the 4th quarter of 2023, the Fed no longer has control of the situation. Congressional spending is the big driver here. That’s why when the Fed lowered the fed funds rate by 100bp (1%) starting in September, the yield on the 10-year Treasury rose by 100bp. The market is pricing in higher future inflation. Simply stated, if Trump wants lower inflation, lower rates from the Fed won’t get him there. He needs to convince Congress to reduce spending.

 

For those of you with questions and opinions, you are always welcome to reach me at IR@DeepKnowledgeInvesting.com

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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